Tuning In: 2026 Outlook

Thank you for that kind introduction and for having me here today. Happy New Year!

One of my favorite parts of the holiday season is spending time with my adult kids. They always teach me something new, leaving me thinking I’m somewhat more in-the-know. Apparently, one of their holiday highlights is “Spotify Wrapped” — a year-end summary of their top songs, podcasts and the like. They track their own statistics but also enjoy sharing and comparing with friends.

Today, I thought I would do a Fed version of that: sharing my own reflections on the economy as highlighted by some of my favorite songs — my “Economy Wrapped,” if you will. Before I jump in, let me make two notes. First, Spotify gave everyone a listening age this year; let’s see if you can guess mine. Second, as always, I speak only for myself and not for anyone else on the Federal Open Market Committee (FOMC) or in the Federal Reserve System.

The Resilient U.S. Economy

Let me kick off with Elton John. “I’m Still Standing” feels like the right note to start. Since 2020, the U.S. economy has seen it all: a global pandemic, a surge in inflation, a sharp increase in interest rates, the failure of multiple banks, a plunge in office real estate values, serious geopolitical conflicts, significant changes back and forth in government policies and more. We’ve heard recession calls over and over and over. The Conference Board’s Index of Leading Economic Indicators has declined in 40 of its last 45 readings; historically, periods of consecutive decline have been a good barometer of a coming downturn.

And yet, the U.S. economy has proven remarkably resilient. R.E.M. got it wrong. It certainly hasn’t been “The End of the World as We Know It.” Third quarter GDP came in at a healthy 4.3 percent. October core retail sales showed that consumers are still spending. And while the unemployment rate has been ticking up, rising in each of the last four reports, it still remains historically low at 4.6 percent. For context, unemployment has only been this low three times in our working lifetimes — in the late ’90s, 2007 and the late 2010s. Core PCE inflation has come back down from its peak and is now at 2.8 percent.

This resilience has been enabled by strong underlying dynamics. Consumers have jobs. Real wages are increasing. Asset values keep growing. Corporate earnings and earnings outlooks remain strong. In those circumstances, it’s hard to imagine consumers and businesses moving to the sidelines. Remember R.E.M.’s next line: “And I feel fine.”

A Year of Uncertainty

Now let me zoom in on 2025 specifically, and David Bowie and Queen’s song “Under Pressure.”

The economy had to grapple with pressure from significant shifts in government policy. Initially, their likely impact seemed clear. Tariffs would increase input costs and restructure established supply chains. Lower net migration would affect consumption and labor availability. Reductions in government spending would hurt federal employment as well as those sectors dependent on government funding, like health care, education, nonprofits and local government. On the other hand, the tax bill and deregulation would increase investment and productivity.

The economy also had to grapple with the resulting uncertainty. I described business conditions last year as driving through fog. It was hard to put your foot on the gas when you didn’t know what was around the next curve. It was hard to slam on the brakes lest it cause an accident. Most businesses spent the year on the side of the road with their hazards on; Not hiring but not firing; Not cutting back on investments but not leaning into more growth.

Phil Collins should weigh in here as “Against All Odds” the economy has stayed solid. How can that be? Remember, the economy is quite complex, and the story of 2025 comes down to the dynamic between frustrated consumers and ever-more productive businesses. Yes, tariffs pushed up input costs, but their impact on prices has been muted. That’s because consumers, exhausted by higher prices, have pushed back, buying more when items go on sale and trading down to lower-priced retailers and private labels. You would have thought that this challenge in passing on costs would have reduced operating margins, but businesses leveraged automation, lower turnover and reduced hiring to drive productivity that served as an offset. Such an increase in productivity reduces job growth, but lower immigration and baby boomer retirements shrank the growth of labor supply at the same time. As a result, the unemployment rate hasn’t moved as much as some may have expected. Federal government spending reductions have similarly been less than many feared. And the explosion of investment in AI has created countervailing momentum.

Let me move on now to 2026. What’s going to happen this year? Well, there’s a pessimistic frame and an optimistic one.

A Sense of Narrowness

The pessimists may want to quote Hall and Oates, saying “I Can’t Go for That.” They argue this prosperity can’t last.

Demand is narrow. The two engines of today’s economy are the AI ecosystem and wealthy consumers. Notably, these two are connected. What would happen if the AI frenzy were to ease? It has been supporting virtually all of the growth in business investment. And any drop in valuations of the Magnificent Seven would surely flow through to net worth and, in turn, to consumption. Recently, I heard from an upscale restaurant that when the stock market has a bad day, they see a dip in foot traffic.

Job growth seems narrow as well. Through November, the economy added an average of 70,000 private sector jobs per month in 2025. But health care and social assistance alone comprised 63,000 of those. What happens if health care hiring pulls back in the context of nervousness over the potential for government funding cuts? What sectors are confident enough, in the context of today’s pace of change, to lean in and replace that job growth?

Finally, sentiment is channeling a different Elton John song: “I Guess That’s Why They Call It the Blues.” Consumer sentiment has dipped notably, reaching the second-lowest reading ever in November, according to the University of Michigan consumer sentiment survey. That’s worse sentiment than during the Global Financial Crisis, recognizing that methodologies evolve. With the fundamentals so solid, I attribute the negativity to continued frustration with the level of prices, as discussed earlier. But we have to recognize that persistent weak sentiment could well affect spending in time.

A Clearer Path Ahead

It feels like it’s time for Journey to weigh in for the optimists with “Don’t Stop Believin’.” 2025’s uncertainty is bound to diminish; the fog should lift. And as firms build confidence in demand and the policy environment, that should be good for hiring and investment. While any easing in AI investment might create some slack, that capacity may well be reallocated quickly to sectors short workers, like homebuilding.

Don’t forget that a lot of stimulus is set to come into the economy. “Easy Money,” as Billy Joel put it. High asset values have eased financial conditions. Fiscal stimulus from the recent tax bill is coming, most notably in coming tax refunds. Gasoline prices are down. Deregulatory initiatives are rolling out. And the impact of the rate cuts we’ve made in the last 16 months — 175 basis points — should flow into the economy as well.

My Perspective

What does this all mean for policy? I’m tempted to rely on the Go-Go’s and just say: “Our Lips Are Sealed.”

But let me say a bit more. Both sides of our mandate bear watching. Unemployment remains low on a historic basis but has ticked up. Inflation has come down but remains above target. With the hiring rate low, no one wants the labor market to deteriorate much further; with inflation above target now for almost five years, no one wants higher inflation expectations to get embedded. It’s a delicate balance.

As the labor market has softened in the past year, the FOMC cut rates further in the fall and to a level now within the range of its estimates of neutral. Think of it as taking out a bit of insurance. But going forward, policy will require finely tuned judgments balancing progress on each side of our mandate. Unfortunately, for the last three months, we’ve been operating without data or with low-quality data that are hard to put much weight upon. That makes our task a bit more challenging. So, I’m looking forward to digging in and learning as clean data start to come in over the coming weeks.

As you can tell from all these song references, I went to college in the ’80s. So, my Spotify age, I’m sad to say, is 64. Thanks, and I look forward to your questions.